Do Loan-to-Value and Debt-to-Income Limits Work? Evidence from Korea

38 Pages Posted: 23 Aug 2011

See all articles by Deniz Igan

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division

Heedon Kang

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: March 23, 2011

Abstract

With another real estate boom-bust cycle bringing woes to the financial sector and economic activity, a quest to design a better policy toolkit to deal with these booms and busts has begun. Macroprudential measures are often advocated as part of such a toolkit and recently have been adopted in a number of countries. Yet, we know very little about the impact of actively- imposed maximum limits on loan-to-value and debt-to-income ratios. This paper takes a step to fill this gap by analyzing the Korean experience with these tools. Using regional data from 2002 to 2010 and survey information on households from 2001 to 2009, we find that such limits are associated with a decline in house price appreciation rates and reduced transaction activity. Furthermore, there is evidence that the limits alter expectations, which play a key role in bubble dynamics. The association with mortgage loan originations and household leverage, however, appears to be weaker, perhaps reflecting the slow-changing nature of balance sheets.

Suggested Citation

Igan, Deniz and Kang, Heedon, Do Loan-to-Value and Debt-to-Income Limits Work? Evidence from Korea (March 23, 2011). Available at SSRN: https://ssrn.com/abstract=1915127 or http://dx.doi.org/10.2139/ssrn.1915127

Deniz Igan (Contact Author)

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Heedon Kang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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